Consideration of a Resolution updating the City’s financial policies 03-05-13

7/29/2019 Consideration of a Resolution updating the Citys financial policies 03-05-13

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TO:

FROM:DATE:

SUBJECT:

CITY OF CARMEL-BY-THE-SEASTAFF REPORT

MAYOR BURNETT AND COUNCIL MEMBERSJ A CITY ADMINISTRATORMARCH 5, 2013FINANCIAL POLICIES

RECOMMENDATION: Consider and adopt resolution updating the investment and fundbalance (reserve) policies and set minimum level for each ofthe reserves.SUMMARY: The City has adopted financial policies approved by resolution of the CityCouncil. At the February 5, 2013 City Council meeting the City Council adopted reviseddebt, operating, and capital financial policies and directed staff to revise and circulatefor comment the investment and reserve policies. The financial policies will guide theoperating plan and budget development process and will be included in Section Fof theFiscal Year 2013-2014 operating plan and budget book. Reserve stability is one of thefive components of the Service Level Sustainability Plan the City Council cons idered in2012.DISCUSSION : The City of Carmel-by-the-Sea has financial policies that establish CityCouncil direction to allow staff to provide sound fiscal planning and continuedmanagement of fiscal integrity. Financial policies are the best way to ensure the City'slong-term fiscal health and enable decisions to be made based on articulated policiesand values.Staff revised the investment and fund balance (reserve) policies based on City Councildirection at the February 5, 2013 meeting. Also at that meeting, the City Councildirected staff to circulate the policies to the City Treasurer, Auditor, Financial Advisor,Finance Manager and Administrative Services Director fo r review and comment. Theattached revised policies include certain comments from all parties as recommended bystaff. Additional comments are included as attached .Recommended Policy UpdatesStaff has reviewed the adopted policies and recommends certain updates as attached.Fund Balance PoliciesThe fund balance policy revisions based on City Council comment from the February 5,2013 meeting include:

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A statement of focus as discussed by the City Council to add to reserves in goodeconomic times with the goal of drawing from the reserves to supplement aconstrained budget and maintain levels of service;

The provision for a distinct litigation reserve has been removed and potentialsettlements will be funded through general reserves and appropriated annuallyby the City Council;

The unassigned fund balance has been recharacterized as a long-term budgetstability reserve. The City will no longer have an unassigned reserve. The policycalls for year-end fund balance to be directed to this reserve;

Reserve limits are now listed as minimum levels rather than maximum levels; The pension obligation fund repayment reserve has been eliminated.

City Auditor comments: A primary change to the Reserve Policies, at therecommendation of the City Auditor, is to rename them Fund Balance policies. Thischange further complies with GASB Statement 54 recharacterization of fund balance(see attached Summary of GASB Statement 54 provided by the City Auditor). In additionthe Auditor has included a sample of a fund balance policy. The auditor's main commentregarding the fund balance policy is that the City may want to start with a whole newpolicy and adapt the City's existing policy elements to fi t with the City's procedures andorganizational structure and staffing.City Treasurer comments: The City Treasurer reviewed the revised policy, met with theCity Administrator, and provided grammatical comments .Financial Advisor comments are pending at the time of this staff report. Comments areexpected and wi ll be provided to the City Council prior to the March 5, 2013 meeting.City Administrator, Administrative Services Director, and Finance Manager commentsare incorporated into the attached recommended changes.

Investment PoliciesThe investment policy revisions based on City Council comment from the February 5,2013 meeting include:

An initial statement of investment caution dur ing this economic period; Clarification ofthe third party bank trust requirements; Constraint of investment options at this time :

o Elimination of U.S. agencies as an investment optiono Elimination of bills of exchange or time draftso Elimination of commercial papero Elimination of repurchase agreementso Elimination of reverse repurchase agreementso Elimination of corporate notes

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City Auditor comments: The City Auditor suggests adding maximum maturities,prohibited investments, allowed investments, monitoring, and reporting. All of thesebecome incorporated into the City's financial statement notes as significant accountingpolicies. Also, typically, these are separate, standalone policies that allow direction tostaff on significant operations from which procedures are developed. The City Auditorincluded a sample investment policy which is attached to this staff report.City Treasurer comments: The City Treasurer reviewed the revised policy, met with theCity Administrator, and provided grammatical comments. In addition the City Treasureris researching collateral requirements and federal insurance provisions fo r investmentof public funds. He provided the California Debt and Investment Advisory Commissionreport (attached).Financial Advisor comments are pending at the time of this staff report. Comments areexpected and will be provided to the City Council prior to the March 5, 2013 meeting.City Administrator, Administrative Services Director, and Finance Manager commentsare incorporated into the attached recommended changes.

Review of Current Policies and Estimates and Setting Reserve LimitsThe chart below identifies the status of the City's policies. Changes based on commentsby the City Council on February 5, 2013 include:

Adding to the chart the City's other reserves and fund balances that are notsubject to the fund balance policy minimum limitations (Fund Balance Policy #7); Eliminating a policy target fo r the litigation reserve;

Eliminating the pension obligation bond prepayment reserve; Eliminating an unassigned General Fund balance and creating a Long-term

Budget Stability reserve and earmarking the previously unassigned fund balanceto the Long-term Budget Stability reserve.

Staff recommends the City Council adopt the revised policies by resolution. Subsequentto adopting the policies the City Council should set minimum reserve levels.Recommended minimum reserve levels are included on the chart on the subsequentpage.

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Attachments:ResolutionFund Balance and Investment PoliciesPolicies indicating changes from February 5, 2013 versionSummary of GASB Statement 54Sample Fund balance policy from City AuditorSample Investment policy from City Audi torCalifornia Debt and Investment Advisory Commission report

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CITY COUNCILCITY OF CARMEL-BY-THE-SEARESOLUTION 2013-

A RESOLUTIONOFTHE CITY COUNCILOFTHE CITYOFCARMEL-BY THE-SEA UPDATINGTHECITY'S FINANCIAL POLICIES

WHEREAS, the City Council has adopted financial policies which embody the values ofthe City, provide stability in a changing financial environment, and provide an enduringframework for financial decision making; and

WHEREAS, these policies should be reviewed and updated on a biannual basis; andWHEREAS, the City' s financial policies are divided into five categories : Capital Budget

Policies; Operating Management; Reserve Policy; Debt Policies; and Investment Policies, eachofwhich ensures that the City maintains a healthy financial foundation into the future.NOW, THEREFORE, BE IT RESOLVED, THAT THE CITY COUNCIL OF THECITY OF CARMEL-BY-THE SEA DOES:

1. Adopt the financial policies as outlined in Attachment "A".PASS ED AND ADOPTED BY THE CITY COUNCIL OF THE CITY OF CARMELBY-THE-SEA on this 5th day ofMarch 2013 by the following roll call vote:

AYES: COUNCIL MEMBERS:NOES: COUNCIL MEMBERS:ABSENT: COUNCIL MEMBERS:

ATTEST:

Heidi Burch, City Clerk

NONENONE

SIGNED:

JASON BURNETT, MAYOR


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FUND BALANCE POLICYThe Fund Balance Policy is des igned to develop standards fo r setting reserve levels for various,significant City fund s. Adequate fund balance and reserve levels are a necessary component of theCity's overall financial management strategy and a key factor in external agencies' measurement of theCity' s financial strength. The City shall maintain reserves at a prudent level, and shall use reservesappropriately with a focus on contributing to the reserves in good times and drawing on the reserves intimes of difficult budget periods to ma intain a consistent level of service and quality operations. Use ofreserves are to supplement the annual budget.Guidelines:

1. General Fund and Hostelry Fund reserves shall be maintained at no less than ten percent (10%)of their annual projected revenues.

2. The City shall maintain prudent reserve s for identified liabilities A Vehicle Replacement reserve wil l be maintained suf ficient to replace vehicles and

heavy equipment at the end of thei r useful lives, with the target being 10% of the totalCity fleet replacement value.

Technology equipment replacement reserves wil l be maintained sufficient to repaircovered equipment and for replacement at the end of its useful life.3. The City will maintain a long-term budget stability reserve consisting of any unassigned General

Fund balance. When available, the year-end General Fund operating surplus will be dedicatedto the long-term budget stability reserve.

4. A general capital reserve fund will be maintained with a targeted balance of 20% of theestimated total five-year capital improvement plan project expenditure. Net proceeds from thesale of City owned property will be dedicated to the general capital reserve. Funds in the generalcapital reserve will be allocated through the budget process for capital projects.

5. Reserves shall be used only for established purposes.6. Depleted reserves shall be restored as soon as possible.7. A minimum level fo r each of the re serve funds shall be established.8. The City shall maintain reserves required by law, ordinance and/ or bond covenants.

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INVESTMENT POLICIESThis is a time to be particularly cautious. Municipal moneys not required for immediate expenditure willbe invested. The City will maintain adequate cash availability and maximum yield on invested idle fundswhile insuring that invested moneys are protected. The Carmel Municipal Code requ ires the CityAdministrator to prepare investment policies and guidelines for adoption by the City Council. Theadopted investment policy follows.INVESTMENT POLICY AND GUIDELINES

In accordance with the Municipal Code of the City of Carmel-by-the-Sea and under authority granted bythe City Council, the City Treasurer is responsible for investing the unexpended cash in the City Treasury.The investment of the City of Carmel-by-the-Sea funds is directed to the goals of safety, liquidity andyield, in that order. The authority governing investments for municipal government is set forth in theCalifornia Government Code , Sections 53601 through 53659.The primary objective of the investment policy of the City of Carmel-by-the-Sea is SAFETY OF PRINCIPAL.Investments shall be placed in those securities as outlined by type and maturi ty sector in this document.Effective cash flow management and resulting cash investment practices are recognized as essential togood fiscal management and control. The City's portfolio shall be designed and managed in a mannerresponsive to the public trust and consistent with state and local law. Portfolio management requirescontinual analysis, and as a resul t the balance between the various investments and maturities maychange in order to give the City of Carmel-by-the-Sea the optimum combination of necessary liquidityand optimal yield based on cash flow projections.

The investment policy applies to all financial assets of the City of Carmel-by-the-Sea as accounted for inthe Annual Financial Report. Policy statements outlined in this document focus on the City of Carmelby-the-Sea's pooled funds, but will also apply to all funds under the City Treasurer's control unlessspecifically exempted by statute or ordinance.Prudence

The standard to be used by investment officials shall be that of a "prudent person" and shall be appliedin the context ofmanaging all aspect sof the overall portfolio . Investments shall be made with judgmentand care, under circumstances then prevailing, which persons of prudence, direction and intelligenceexercise in the management of their own affairs, not fo r speculation, but fo r investment, considering theprobable safety of their capital as well as the probable income to be derived.It is the City's full intent, at the time of purchase, to hold all investments until maturity to insure thereturn of all invested principal dollars.

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Safety of principal is the foremost objective of the City. Each investment transaction shall seek to ensurethat capital losses are avoided, whether from securities default, broker-dealer default, or from erosionof the market value.LiquidityHistorical cash flow trends are compared to current cash flow requirements on an ongoing basis in aneffort to ensure that the City's investment portfol io will remain sufficiently liquid to enable the City tomeet all reasonably anticipated operating requirements.YieldThe investment portfolio should be designed to attain a market average rate of return throughbudgetary and economic cycles, consistent with the risk limitations, prudent investment principles andcash flow characteristics identified within the financial statements.Performance EvaluationInvestment performance is continually monitored and evaluated by the City Treasurer. Investmentperformance statistics and activity reports are generated on a monthly basis fo r presentation to the CityAdministrator and City Council.Delegation o(AuthorityFor short-term investments, the Administrative Services Director has authority to make transfers to andfrom the City's Local Agency Investment Funds (LAIF) account in order to maximize interest earned andmeet cash flow requirements. The transfers are made to and from the City ' s general checking accountto the LAIF account, with a minimum balance maintained in the general checking account to meet dailycash requirements.The City Treasurer is responsible for investment of all unexpended City funds as per CaliforniaGovernment Code section 41000 et seq. The City Treasurer makes long-term investments after reviewand approval by the Administrative Services Director and the City Administrator.Ethics and Conflict oflnterestOfficers and employees involved in the investment process shall refrain from personal business activitythat conflicts with the proper execution of the investment program, or impairs their ability to makeimpartial investment decisions. Additionally, the City Treasurer and the members of the investmentcommittee are required to annually file applicable financial disclosures as required by the Fair PoliticalPractices Commission (FPPC).Safekeeping o(SecuritiesTo protect against fraud, embezzlement, or losses caused by a collapse of an individual securities dealer,all securities owned by the City shall be held in safekeeping by a third party bank trust department,acting as an agent of the City under the terms of a custody agreement or PSA agreement (repurchaseagreement collateral). The third party bank trust department must have safe keeping as a professionalbusiness line with expertise in this particular service area . All trades executed by a dealer will settle

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Delivery vs . Payment (DVP) through the City's safekeeping agent. Securities held in custody for the Cityshall be independently audited on an annual basis to verify investment holdings.All exceptions to this safekeeping policy must be approved by the City Treasurer in written form andincluded in quarterly reporting to the City Council.Internal ControlSeparation of functions between the City Treasurer's Office and the Administrative Services Departmentwould be an ideal situation. Time and necessity, however, dictate a different approach. Due to the lackof personnel dedicated to the investment function alone, a proper balance must be maintained betweenTreasury activities and Administrative Services Department functions. The City Treasurer will make theappropriate arrangements to buy and sell securities that are deemed permissible by the Laws of theState of California as time permits. The Administrative Services Director and/or City Administrator willhave the power as granted under the section titled Delegation of Authority in the absence of the CityTreasurer. The City Administrator will have the authority to enter into agreements on securities so longas wri tten policies set by the City Treasurer and State Legislature are followed.The investment portfol io and all related transactions are reviewed and balanced to appropriate generalledger accounts by the Administrative Services Director on a monthly basis . An independent analysis byan external auditor shall be conducted annually to review internal control, account activity, andcompliance with government policies and procedures.ReportingThe City Treasurer shall review and render monthly reports to the City Administrator and the CityCouncil, which shall include the face amount of the cash investment, the classification of the investment,the name of the institution or entity, the rate of interest, the maturity date, and the current value andaccrued interest to date due for all securities.Qualified Broker/DealersThe City shall transact business only with banks and broker/dealers that are properly licensed and ingood standing. The Administrative Services Director and the City Treasurer shall investigate dealers whowish to do business with the City to determine if they are adequately capitalized and if they marketsecurities appropriate to the City's needs.The City Treasurer shall annually send a copy of the current investment policy to all broker/dealersapproved to do business with the City. Confirmation of receipt of the City's policy by the broker/dealershall be considered evidence that the broker/dealer understands the City's investment policies andintends to sell the City only appropriate investments authorized by this investment policy.Collateral RequirementsCollateral is required for investments in certificates of deposit. In order to reduce market risk, thecollateral level will be at lea st 110%of market value of principal and accrued interest.In order to conform with the provisions of the Federal Bankruptcy Code that provide for liquidation ofsecurities held as collateral, the only securities acceptable as collateral shall be certificates of deposit,commercial paper, eligible banker's acceptances, medium term notes or securities that are the directMarch 5, 2013


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obligations of, or are fully guaranteed as to principal and interest by, the United States or any agency ofthe United States.Authorized Investments

Investment of City funds is governed by the California Government Code Sections 53600 et seq. Withinthe context of the limitations, the following investments are authorized as further limited herein:

1) United States Treasury Bills, Bonds, and Notes or those for which the full faith and credit of theUnited States are pledged for payment of principal and interest. There is no percentagelimitation of the portfolio that can be invested in this category, although a five-year maturitylimitation is applicable but current market conditions and i n t e r e ~ t rate projections may call forshorter terms.

2) Local Agency Investment Fund {LAIF), which is a State of California managed investment pool,may be used up to the maximum permitted by the California State Law . LAIF is a demandaccount so no maturity limitation is required.

Investments detailed in items 3) and 4) are further restricted to percentage of the cost value of theportfolio in any one-issuer name to a maximum percentage of 15%. The total value invested in any oneissuer shall not exceed 5% of the issuer's net worth. Again, a five-year maximum maturi ty is applicableunless further restricted by current policy. Market conditions should be evaluated as an importantconsideration and may indicate a shorter maturity.

3) Negotiable certificates of deposit issued by nationally or state chartered bank or state or federalsavings institutions. Negotiable certificates of deposit shall be rated in a category of "A" or itsequivalent or better by two Nationally Recognized Statistical Rating Organizations. Purchases ofnegotiable certificates of deposit may not exceed 30% of the total portfolio. A maturitylimitation of up to five years is applicable after considered evaluation of the financial markets.

4) Time deposits, non-negotiable and collateralized in accordance with the California GovernmentCode, may be purchased through banks or savings and loan associations. Since time depositsare not liquid, no more that 15% of the investment portfo lio may be invested in this type ofinvestment.

Ineligible investments are those that are not described herein, including, but not limited to, commonstocks and long term (over five years maturity) notes and bonds, unless specifically allowed both bystate law and City Council approval. It is noted that special circumstances may arise where thesemethods of investment may become necessary. When this becomes necessary, the City Council will beasked to take the appropriate action to ratify the means of investment necessary, provided that it isallowable by California Code.

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Legislative ChangesAny State of California legislative actions that further restrict allowable maturities, investment type, orpercentage allocations will supersede any of the material presented herein. In this case, the applicablelaw will become part and parcel of this investment policy.Interest EarningsAll moneys earned and collected from investments authorized in this policy shall be allocated monthly tothe General Fund and various special funds of the City that legally require interest proration or whenCity Council action dictates such proration. This distribution will be based on the cash balance in thefund as a percentage of the entire pooled portfolio.Policy ReviewThe City of Carmel-by-the-Sea's investment policy shall be approved by resolution of the City Council.This investment policy shall be reviewed at least annually to ensure its consistency with the overallobjectives of preservation of principal, liquidity and yield, and its relevance to current law and financialand economic trends. Any amendments to the policy, other than State and Federal laws thatautomatically supersede the relevant sections shall be forwarded to the City Council for approval byresolution.

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FUND B A L A N C E R ~ S ~ I W ~ POLICY (Peliey Ne, CQq Q1)The Reserve Fund Balance Policy is designed to develop standards fo r setting reserve levels fo r various,significant City funds. Adequate fund balance and reserve levels are a necessary component of theCity's overall financial management strategy and a key factor in external agencies' measurement of theCity's financial strength. The City shall maintain reserves at a prudent level, and shall use reservesappropriately wi th a focus on contributing to the reserves in good times and drawing on the reserves intimes of difficult budget periods to maintain a consistent level of service and quality operations. Use ofreserves are to supplement the annual budget.Guidelines:

1. General Fund and Hostelry Fund reserves shall be maintained at no less than ten percent (10%)of their annual projected revenues.

2. The City shall maintain prudent reserves fo r identified liabilities A Vehicle Replacement reserve will be maintained sufficient to replace vehicles and

heavy equipment at the end of their useful lives .. with the target being -10% of the totalCity fleet replacement value.

Technology equipment replacement reserves will be maintained sufficient to repaircovered equipment and fo r replacement at the end of ts useful life. A litigation reserve will be Fflaintained to cover potential liability for tort claiFfls or other

litigation settleFflents. The target reserve balance is based on all the kno.vn claimsagainst the City and those claiFfls that might have occl::lrred, bl::lt are not yet reported.The reserve balance shall be appropriated on an annl::lal basis fo r imFflediate access asal::lthorized .

3. The City w ill maintain a long-term budget stability reserve consisting of any unassigned GeneralFund balance. When available, the year-end Gen eral Fund operating surplus will be dedicatedto the long-term budget stability reserve.

general capital reserve fund will be maintained with a targeted balance of 20% of theestimated total f ive-year capital improvement plan project expenditure estiFflate. Wfle.Ravailable the annl::lal General ~ l : : l n d operating Sl::lrpll::ls will be dedicated to the general capitalreserve. In addition, n___liet proceeds from the sale of City owned property will be dedicated tothe general capital reserve. Funds in the general capital reserve will be allocated through thebudget process fo r capital projects.

4.-.2.,.Reserves shall be used only fo r established purposes. . : . D e p l e t e d reserves shall be restored as soon as possible.

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INVESTMENT POLICIESThis is a time to be particularly cautious. Municipal moneys not required for immediate expenditure willbe invested. The City will maintain adequate cash availability and maximum yield on invested idle fundswhile insuring that invested moneys are protected. The Carmel Municipal Code requires the CityAdministrator to prepare investment policies and guidelines for adoption by the City Council. Theadopted investment policy follows.INVESTMENT POLICY AND GUIDELINESC89 27

In accordance with the Municipal Code of the City of Carmel-by-the-Sea and under authority granted bythe City Council, the City Treasurer is responsible for investing the unexpended cash in the City Treasury.The investment of the City of Carmel-by-the-Sea funds is directed to the goals of safety, liquidity andyield, in that order. The authority governing investments fo r municipal government is set forth in theCalifornia Government Code, Sections 53601 through 53659.The primary objective of the investment policy of the City of Carmel-by-the-Sea is SAFETY OF PRINCIPAL.Investments shall be placed in those securities as outlined by type and maturity sector in this document.Effective cash flow management and resulting cash investment practices are recognized as essential togood fiscal management and control. The City's portfol io shall be designed and managed in a mannerresponsive to the public trust and consistent with state and local law. Portfolio management requirescontinual analysis . and as a result the balance between the various investments and maturities maychange in order to give the City of Carmel-by-the-Sea the optimum combination of necessary liquidityand optimal yield based on cash flow projections.

The investment policy applies to all financial assets of the City of Carmel-by-the-Sea as accounted for inthe Annual Financial Report. Policy statements outlined in this document focus on the City of Carmelby-the-Sea's pooled funds, but will also apply to all funds under the City Treasurer's control unlessspecifically exempted by statute or ordinance.Prudence

The standard to be used by investment officials shall be that of a "prudent person" and shall be appliedin the context of managing all aspects of the overall portfolio. Investments shall be made with judgmentand care, under circumstances then prevailing, which persons of prudence, direction and intelligenceexercise in the management of thei r own affairs, not for speculation, but for investment, considering theprobable safety of their capital as well as the probable income to be derived.It is the City's full intent, at the time of purchase, to hold all investments until maturity to insure thereturn of all invested principal dollars.

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Safety of principal is the foremost objective of the City. Each investment transaction shall seek to ensurethat capital losses are avoided, whether from securities default, broker-dealer default, or from erosionof the market value.LiquidityHistorical cash flow trends are compared to current cash flow requirements on an ongoing basis in aneffort to ensure that the City's investment portfolio will remain sufficiently liquid to enable the City tomeet all reasonably anticipated operating requirements.YieldThe investment portfolio should be designed to attain a market average rate of return throughbudgetary and economic cycles, consistent with the risk limitations, prudent investment principles andcash flow characteristics identified within the financial statements.Performance EvaluationInvestment performance is continually monitored and evaluated by the City Treasurer. Investmentperformance statistics and activity reports are generated on a monthly basis for presentation to the CityAdministrator and City Council.Delegation o(AuthorityFor short-term investments, the Administrative Services Director has authority to make transfers to andfrom the City's Local Agency Investment Funds (LAIF) account in order to maximize interest earned andmeet cash flow requirements. The transfers are made to and from the City's general checking accountto the LAIF account, with a minimum balance maintained in the general checking account to meet dailycash requirements.The City Treasurer is responsible for investment of all unexpended City funds as per CaliforniaGovernment Code section 41000 et seq. The City Trea surer makes long-term investments after reviewand approval by the Administrative Services Director and the City Administrator.Ethics and Conflict of nterestOfficers and employees involved in the investment process shall refrain from personal business activitythat conflicts with the proper execution of the investment program, or impairs their ability to makeimpartial investment decisions. Additionally, the City Treasurer and the members of the investmentcommittee are required to annually file applicable financial disclosures as required by the Fair PoliticalPracticesCommission (FPPC).Safekeeping ofSecuritiesTo protect against fraud, embezzlement, or losses caused by a collapse of an individual securities dealer,all securities owned by the City shall be held in safekeeping by a third party bank trust department,acting as an agent of the E ~ i t y under the terms of a custody agreement or PSA agreement (repurchaseagreement collateral). The third party bank trust department must have safe keeping as a professiona lbusiness line with expertise in this particular service area. All trades executed by a dealer will settle

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Delivery vs. Payment (DVP) through the City's safekeeping agent. Securities held in custody for the Cityshall be independently audited on an annual basis to verify investment holdings.All exceptions to this safekeeping policy must be approved by the City Treasurer in written form andincluded in quarterly reporting to the City Council.-Internal ControlSeparation of functions between the City Treasurer's Office and the Administrative Services Departmentwould be an ideal situation. Time and necessity, however, dictate a different approach. Due to the lackof personnel dedicated to the investment function alone, a proper balance must be maintained betweenTreasury activities and Administrative Services Department functions. The City Treasurer will make theappropriate arrangements to buy and sell securities, ~ t h a t are deemed permissible by the laws ofthe State of California as time permits. The Administrative Services Director and/or City Administratorwill have the power as granted under the section titled Delegation of Authority in the absence of theCity Treasurer. The City AdministratorAdmiAistrative Services Director will have the authority to enterinto agreements on securities so long as written policies set by the City Treasurer and State legislatureare followed.The investment portfolio and all related transactions are reviewed and balanced to appropriate generalledger accounts by the Administrative Services Director on a monthly basis.-_An independent analysis byan external auditor shall be conducted annually to review internal control, account activity, andcompliance with government policies and procedures.ReportingThe City Treasurer shall review and render monthly reports to the City Administrator and the CityCouncil . which shall include the face amount of the cash investment, the classification of the investment,the name of the institution or entity, the rate of interest, the maturity date, and the current marketvalue and accrued interest to date due for all securities.Qualified Broker/DealersThe City shall transact business only with banks and broker/dealers that are properly licensed and ingood standing. The Administrative Services Director and the City Treasurer shall investigate dealers whowish to do business with the City to determine if they are adequately capitalized and if they marketsecurities appropriate to the City's needs.The City Treasurer shall annually send a copy of the current investment policy to all broker/dealersapproved to do business with the City. Confirmation of receipt of the City's policy by the broker/dealershall be considered evidence that the broker/dealer understands the City's investment policies andintends to sell the City only appropriate investments authorized by this investment policy.Collateral RequirementsCollateral is required for investments in certificates of deposit. In order to reduce market risk, thecollateral level will be at least 110% of market value of principal and accrued interest.In order to conform with the provisions of the Federal Bankruptcy Code 'Nhich that provides forliquidation of securities held as co llateral, the only securities acceptable as collateral shall be certificatesMarch 5, 2013


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of deposit, commercial paper, eligible banker's acceptances, medium term notes or securities that arethe direct obligations of, or are fully guaranteed as to principal and interest by, the United States or anyagency of the United States.Authorized InvestmentsInvestment of City funds is governed by the California Government Code Sections 53600 et seq . Withinthe context of the limitations, the following investments are authorized as further limited herein:

1) United States Treasury Bills, Bonds, and Notes or those for which the full faith and credit of theUnited States are pledged for payment of principal and interest. There is no percentagelimitation of the portfolio which that can be invested in this category, although a five-yearmaturity limitation is applicable but c"u rrent ma rket conditions and interest ra te pro jec tionsmay call for shorter terms.

2) United States agency bonds or obligations issued by the Government National MortgageAssociation (GNMA), the l=ederal !=arm Credit Bani< (I=I=CB), the l=ederal ~ o r n e Loan Bani< (Ho!LB),the l=ederal National Mortgage i\ssociation (I=NMA), the Stuaent Loan Marketing Association(SLMA), ana the Feaeral ~ o r n e Loan Mortgage Company ( I = ~ L M C ) There is no percentagelimitation of the portfolio which can be inestea in this category, although a fi 1e year maturitylimitation is applicable.

-3-tl).local Agency Investment Fund (LAIF)J. which is a State of California managed investment pooiJ.may be used up to the maximum permitted by the California State la w. LAIF is a demandaccount so no maturity limitation is required.

Investments detailed in items 3) and 4 )4 through 10 are further restricted to percentage of the costvalue of the portfolio in any one-issuer name to a maximum percentage of 15%. The total valueinvested in any one issuer shall not exceed 5% of the issuer's net worth. Again, a five-year maximummaturity is applicable unless further restricted by #Hs-current pol icy. Market condit ions should beevaluated as an important consideration and may indicate a shorter maturity.

4) Bills of e>


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7) Repurchase agreeA'lents, which speciP, terA'ls and conditions, Fl'lay be transacted with bani(S andbrol(er dealers. The Fl'laturity of repurchase agreeA'lents shall not e)(ceed 90 days. The Fl'larketvalue of the securities used as collateral for the repurchase agreeA'lents shall be Fl'lonitored bythe investA'lent staff and shall not be alloNed to fall below 102% of the 'ralue of the repurchaseagreeA'lent. A Public Securities AgreeA'lent Master Repurchase AgreeA'lent is required betweenthe City of CarA'lel by the Sea and the brol(er dealer or financial institution for all repurchaseagreeA'lents transacted.

8) Reverse repurchase agreeA'lents which specifies terA'ls and conditions Fl'lay be transacted withbrol(er dealers and financial institutions but can not e)(ceed 2 0 9 ~ of the portfolio ,alue on thedate entered into. The City Fl'lay enter into a reverse repurchase agreeA'lent only to fund shortterA'l liquidity needs. The terA'l of reverse repurchase agreeA'lents Fl'lay not e)(ceed 90 days.

gj1J.Time deposits, non-negotiable and collateralized in accordance w ith the California GovernmentCode, may be purchased through banks or savings and loan associations. Since time depositsare not liquid, no more that ~ 1 5 % of the investment portfolio may be invested in this type ofinvestment.

10) Medium Term Corporate Notes, with a ma)(imum maturity of five years may be purchased.Securities eligible for investment shall be rated A or higher by Moody's or Standard and Poor'srating services. Purchase of Fl'ledium term notes may not el(Ceed 30% of the market value of theportfolio and not Fl'lore than 15% of the market value Fl'lay be invested in notes issued by onecorporation. Commercial paper holdings should also be included when calculating the 15%limitation.

Ineligible investments are those that are not described herein, including, but not limited to+. commonstocks and long term (over five years maturity) notes and bonds, are prohibited from use in thisportfolio unless specifically allowed both by state law and City Council approval. It is noted that specialcircumstances may arise where these methods of investment may become necessary. When thisbecomes necessary, the City Council will be asked to take the appropriate action to ratify the means ofinvestment necessary, provided that it is allowable by California Code.LegislativeChangesAny State of California legislative actions that further restricts allowable maturities, investment type, orpercentage allocations will supersede any of the material presented herein. In this case, the applicablelaw will become part and parcel of this investment policy.Interest EarningsAll moneys earned and collected from investments authorized in this policy shall be allocated monthly tothe General Fund and various special funds of the City whlffi-.that legally require interest proration orwhen City Council action dictates such proration. This distribution will be based on the cash balance inthe fund as a percentage of the entire pooled portfolio.Policy ReviewThe City of Carmel-by-the-Sea's investment policy shall be approved by resolution of the City Council.This investment policy shall be reviewed at least annually to ensure its consistency with the overallobjectives of preservation of principal, liquidity and yield, and its relevance to current law and financialand economic trends. Any amendments to the policy, other than State and Federal laws, thatwi=HffiMarch 5, 2013


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automatically supersede the relevant sections, shall be forwarded to the City Council for approval byresolution.

March 5, 2013


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Summary of GASB Statement 54Redefines fund categories and uses more specifically:

Governmental funds are used for taxes and grants -General Fund - Principal operating fund.Special Revenue Funds- Account for restricted revenues (for specified purposes).Capital Projects Funds- For construction or acquisition ofgovernmental capitalassets (capital outlay).Debt Service Funds -Account for repayment ofdebt.Pennanent Funds - Account for Endowments or similar arrangements.

Proprietary funds are used for business-type activities-Enterprise Funds - For services provided to customers on a user fee basis.Internal Service Funds - For cost allocation such as insurance or motor poolcharges.

Fiduciary funds are used for activities where the government is the agent or trustee -Private purpose trust funds- Resources are managed for outsiders as a trustee.Pension and other employee benefit trust funds - Resources held in trust for thepayment of employee benefits.Investment Trust Funds - Investments managed for outside parties as a trustee.Agency Funds- Resources held temporarily in a custodial capacity.


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Redefines the components of Fund Balance -Nonspendable FundBalance-

Assets that will never convert to cash (prepaid items, inventory)Assets that will not convert to cash soon enough to affect the currentperiod (property held for resale, long-term notes or loans receivable)Resources that must be maintained intact pursuant to legal or contractualrequirements (the principal of an endowment)

Restricted Fund Balance -R e ~ o u r c e s that are subject to externally enforceable legal restrictionsimposed by parties altogether outside the government (Creditors, Grantors,Contributors and Other Governments).Resources that are subject to limitations imposed by law throughconstitutional provisions or enabling legislation (Gas Tax).

Committed Fund Balance -Self imposed limitations set in place prior to the end of the period.Limitation at the highest level ofdecision-making (legislative body) thatrequires formal action at the same level to remove.

Assigned Fund Balance -Amounts in excess ofnonspendable, restricted, and committed fundbalance in funds other than the general fund automatically would bereported as assigned fund balance.Limitation resulting from intended use

Intended use established by highest level of decision-making.Intended use established by body designated for that purpose.Intended use established by official designated for that purpose.


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Unassigned FundBalance-Residual net resources

Additional Provisions:

Total fund balance in the general fund in excess ofnonspendable,restricted, committed and assigned fund balance (surplus).Excess ofnonspendable, restricted, and committed fund balanceover total fund balance (deficit).

Governments should establish a fund balance policy, which is relevant for categorizingcommitted, assigned and unassigned fund balance. Alternatively, a government couldestablish a stabilization arrangement in which resources could be accumulated ascommitted fund balance. A fund balance policy could provide guidance on howcommitted and assigned amounts are derived for such things as encumbrances in thegeneral fund. Significant encumbrances are reported in note disclosures by major andnonmajor funds in the aggregate along with the other required disclosures about othersignificant commitments.

Effective Date and Transition:The Statement is effective for financial statements for periods beginning after June 15,2010. Early implementation is encouraged. Fund balance reclassifications made toconform to provisions of the Statement should be applied retroactively by restating fundbalance for all prior periods presented. Changes to the fund balance informationpresented in the Statistical Section may be made prospectively, although retroactiveapplication is encouraged. If the information for previous years is not restated,governments should explain the nature of the differences from the prior information.


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0

MEMOTo:From:Date:

SAN MATEO COUNTY LIBRARYConnect. Discover. Evolve.

JPA Governing BoardAnne-Marie Despain, Director of Library ServicesPam Deal, Financial Services ManagerJanuary 31, 2011

Meeting Date: February 7, 2011Re: Library Fund Balance Policy

BACKGROUND:

Agenda Item VIII.

As outlined in the San Mateo County Library Joint Powers Authority (Library) Agreement, the GoverningBoard is responsible for creating, adopting and maintaining by-laws and related policies to provide forthe conduct ofLibrary business. Prudent financial management suggests that all governmental entitiesshould establish fund balance policies to provide the required resources when responding tounforeseen events and meeting operating needs.The purpose of the Library Fund Balance Policy is to establish reasonable guidelines tailored to theneeds of the San Mateo County Library Joint Powers Authority which ensure that adequate funds areavailable to: Mitigate significant economic downturns or revenue shortfalls Cover future innovative opportunities related to system improvements

Provide for future projects.The elements of the policy are created by the Library for its own purposes and may be revised asneeded in the future. In developing this policy, the Library reviewed and considered informationprovided by the Government Rnance Officers Association (GFOA), the Governmental AccountingStandards Board (GASB) Statement No. 54, Fund Balance Reporting and Governmental Fund TypeDefinitions, and other jurisdictions' practices.DISCUSSION:Fund balance is generally defined as the difference between fund assets and fund liabilities remainingat year-end. For budgetary purposes, this represents the sum ofover-realized or unanticipatedrevenues and unspent appropriations or reserves at the end ofeach fiscal year. Fund balance is"surplus" only to the extent that it has not been committed, identified for a purpose or s available for re-appropriation to a different purpose.GASB 54 BackgroundThe GFOA issued Statement No. 54, Fund Balance Reporting and Governmental Fund TypeDefinitions, in February 2009. Governments are required to implement Statement 54 for fiscal years firstending June 30, 2011. This statement establishes a constraint-based approach in reporting fundbalances. The statement also revises governmental fund type definitions and clarifies required reporting


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for stabilization eRainy Day") funds. GASB 54 distinguishes up to five separate categories of fundbalance based on theextent to which the government is bound to honorconstraints on thespecificpurposes forwhich amounts can be spent. Not all categories will necessarily be utilized. The onecategory applicable to the Library is Committed Fund Balance and defined below: Committed Fund Balance: Amounts constrained to specific purposes by a government itself,using its highest level of decision-making authority; to be reported as committed, amountscannot be used for any other purpose unless the government takes the same highest levelaction to remove or change the constraint.

Fund Balance StandardsThere is no nationally unifonn standard regarding the appropriate level of unrestricted fund balance (i.e.the amounts reported as committed fund balance) local governments should maintain. Manyjurisdictions have in place policies which maintain unrestricted fund balance in the range of five tofifteen percent of general fund operating revenues or operating expenditures.The Government Anance Officers Association (GFOA) recommends that " ..general purposegovernments maintain at a minimum an unrestricted fund balance of no less than two (2) months or16.7% of regular general fund operating revenues or regular general fund operating expenditures. Theadequacy of unreserved fund b a l ~ n c e in the general fund should be assessed based upon agovernment's own circumstances. Furthennore, such measures should be applied within the context oflong-tenn forecasting , thereby avoiding the risk ofplacing too much emphasis upon the level ofunreserved fund balance in the general fund at any one time."Fund Balance Policy Proposed GoalsStabilization CommitmentsThe proposed Library Fund Balance Policy exceeds the GFOA recommendation and states that theLibrary shall maintain amounts equal to no less than 20% of adopted general fund operatingappropriations in the category identified as Stabilization Commitments (net appropriations exclusive ofone-time activities). These funds are intended to provide a financial cushion against unanticipatedadverse financial or economic circumstances. Stabilization Commitments may be used to addresstemporary cash flow shortages, emergencies, unanticipated economic downturns, and one-timeopportunities to stabilize current operations.The FY 2010-11 Adopted Budget approved by the Governing Board has $3,656,026 or 20% ofoperating appropriations set aside as Stabilization Commitments.Capital Project CommitmentsA government may designate some unreserved fund balance to express its intention to use availableresources in a particular manner. A designation is not legally binding but does convey a government'splans forusing its available resources. The proposed Library Fund Balance Policy includes adesignation for this purpose titled "Capital Project Commitments" and states that the Library shallmaintain amounts equal to no less than two million five hundred thousand ($2,500,000) in this category.The purpose of he Capital Project Commitments is to anticipate capital outlay and capital project needsand have a plan in place for the order1y provision of inancing those needs. The Capital ProjectsCommitments figure of $2 .5 mil represents a range ofapproximately 7-8% of net appropriations andreflects a figure that is reasonably achievable and would allow the system to implement some level ofanticipated one-time activities.The Library currently exceeds the proposed policy recommendation. The FY 2010-11 Adopted Budgetapproved by the Governing Board has $6,554,321 or 36% of operating appropriations set aside asCapital Project Commitments.


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Other Policy ProvisionsMinimum Fund Balance RequirementsIn the event funds are not available to maintain minimum required balances as detailed under Section IIFund Balance Goals, Committed Fund Balance, the Governing Board must approve and adopt a planto restore this balance to the target level by adding an amount to the budget to cover the deficiencyover a period not to exceed five (5) fiscal years. If restoration of he commitment cannot beaccomplished within such period without severe hardship to the Library, then the Governing Board willestablish a different time period or change the committed amount requirement.Utilization of Fund BalanceAppropriation of he revenues set aside in Committed Fund Balance shall require the approval of theGoverning Board and shall be only for ona.time uses and not for ongoing expenditures unless a viablerevenue plan designated to sustain the expenditures is adopted.Annual ReviewCompliance with the provisions of this policy shall be reviewed as part of he annual budget adoptionprocess.STRATEGIC PLAN ALIGNMENT:Goal4: Become a learning organization that continuously assesses community needs and developsstaff to provide excellent customer service; and Objective 4.1: Assess and allocate resources to be aworld-class library.This activity aligns with the goal by proactively examining financial strategies and solutions in a way thatmakes possible the effective delivery of high quality services and achieving Library goals.FISCAL IMPACT:There is no fiscal impact associated with adopting the Library Fund Balance Policy.RECOMMENDATION:Recommend Governing Board adoption of he Library Fund Balance Policy. Operations Committeemembers present at the January 25, 2011 meeting concur with this recommendation.ATTACHMENT:Library Fund Balance Polley


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I. Purpose

San Mateo CountyUbraryJointPowers Authori ty

FUND BALANCE POUCY

Prudent financial management suggests that all governmental entities should establish fund balance policiesto provide the required resources when responding to unforeseen events and meeting operating needs. Thepurpose of his Fund Balance Policy is to establish reasonable guidelines tailored to the needs of he SanMateo County Library Joint Powers Authority (Library) which ensure that adequate funds are available to: Mitigate significant economic downturns or revenue shortfalls Cover future innovative opportunities related to system improvements Provide forfuture projectsFund Balance isgenerally defined as the difference between fund assets and fund liabHities remaining atyear-end. For budgetary purposes, this represents the sum ofover-realized or unanticipated revenues andunspent appropriations or reserves at the end ofeach fiscal year.The Poficy aligns with the reporting standards outlined in GASB 54 (the Governmental Accounting StandardsBoard Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions). GASBStatement 54 established fund balance classifications that comprise a hierarchy based primarily on the extentto which a government is bound to observe constraints imposed upon the use of he resources reported ingovernmental funds.11. Fund Balance GoalsThe following individual items shall constitute the library Fund Balance.Committed Fund BalanceCommitted Fund Balance consists ofamounts that can be used only for the specific purposes detennined bya fonnal action of the govemmenfs highest level of decision-making authority, in this case, the GoverningBoard. Commitments may be changed or rifted only by the Governing Board taking the same fonnal actionthat imposed the constraint originally.The Library has established two primary categories ofCommitted FundBalance as follows: Stabilization Commitments Capital Project Commitments

Stabilization CommitmentsGovernments often establish Mrainy day funds" or "stabilization funds" to provide a financial cushionagainst unanticipated adverse financial or economic circumstances. The Library is committed tomaintaining a prudent level of inancial resources to protect against the need to reduce service levelsbecause of temporary revenue shortfalls or unpredicted one-time expenditures. StabilizationCommitments may be used to address temporary cash flow shortages, emergencies, unanticipatedeconomic downturns, and one-time opportunities to stabilize current operations.The Library shall maintain amounts equal to no less than twenty percent (20%) ofadopted general fundoperating appropriations in the category identified as Stabilization Commitments (netappropriationsexclusive ofone-time activities).There Is no nationally uniform standard regarding the appropriate levelofunrestricted fund balance (i.e.the amounts reported ascommitted) local governments should maintain. However, the GovernmentFinance Officers Association (GFOA) recommends that. ..general purpose governments ma intain at aminimum an unrestricted fund balance ofno less than two (2) months or 16. 016 of egular general fundoperating revenues or regular general fund operating expenditures. The adequacy of unreserved fund

Library Fund Balance Poflcy- February 2011


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...balance in the general fund should be assessed basedupon a government's owncircumstances.Furthenno/'9, such measures should be applied within the contextof ong-tenn forecasting, therebyavoiding the risk ofplacing too much emphasis upon the levelofunf9Seflled fund balance in the generalfund at any one time."Capital Project Commitmentscapital Project Commitments may be used to address innovative opportunities related to operationalimprovements and asset replacement needs as approved by the Governing Board. Activities such asmajor equipment purchases, facility renovations, and system-wide projects are not specified in this policystatement, but are Identified by the Library, as part of the annual budget development process.The Library shall maintain amounts equal to no less than two million five hundred thousand ($2,500,000)In the category identified as Capital Project Commitments.

Ill. Minimum Fund Balance RequirementsIn the event funds are not available to maintain minimum required balances as detailed under Section II FundBalance Goals; Committed Fund Balance, the Governing Board must approve and adopt a plan to restorethis balance to the target level by adding ar amount to the budget to cover the deficiency over a period not toexceed five (5) fiscal years. Ifrestoration of he commitment cannot be accomplished within such periodwithout severe hardship to the Library, then the Governing Board will establish a different time period orchange the committed amount requirementIV. Utilization of Fund BalanceAppropriation of the Committed Fund Balance shall require the approval of the Governing Board and shall beonly for one-time uses and not for ongoing expenditures unless a viable revenue plan designated to sustainthe expenditures is adopted.V. Annual ReviewCompliance with the provisions of his policy shall be reviewed as part of he annual budget adoption process.

Library Fund Balance Policy - February 2011


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STAFF REPORTCity Council Agenda

June 15, 2011

TO: Randy Mendosa, City ManagerFROM: Janet M. Luzzi, Finance DirectorSUBJECT: Approval ofAnnual Investment Policy for Fiscal Year 2010/11DATE: June 7, 2011

RECOMMENDATIONIt is recommended that the City Council: Adopt the City's investment policy for Fiscal Year. 2011112 .

.DISCUSSIONSection 53646(a) of the California Government Code requires that the treasurer annually providethe City Council with a statement of nvestment policy for consideration at a public meeting. TheCity's current investment policyattached was originally adopted on April15, 1998 andsubsequently revised on June 18, 2003. The authorized investments include all those identified inSection 53601 of he California Government Code. In addition, the City ofArcata has includedseveral social screens which prohibit direct investment in corporations that: a) receive any revenue from the sale of obacco or tobacco products;b) receive any revenue from the manufacture ofnuclear weapons or nuclear weaponcomponentsc) receive any revenue from the production ofnuclear energyIn addition to the prohibitions outlined above, the long-term goal of he City's investment policy isto prohibit investment in corporations with a record of gross ecological and environmentaldegradation; gross violations of he rights ofworkers; or corporations that invest in countries thathave gross violations ofhuman rights.

BUDGET/FINANCIAL IMPACTAdoption of his policy does not have any budget/financial impact. However, it serves as a guidefor the investmentof he City' s idle funds.


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Investment Policy(Revised 6/18/03)


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INVESTMENT POLICYCity ofArcata

Table ofContents

I. Investment Philosophy 1A. Policy 1B. Investment Objectives 1c. Prudence 1D. Ethics and Conflicts of Interest 2II. Operational and Procedural MattersA. Scope 2

B. Delegation ofAuthority 2C. Authorized Financial Dealers and Institutions 2D. Delivery vs. Payment 3E. Safekeepingof Securities 3

III. Permitted Investments and Risk ManagementA. Authorized InvestmentS 3B. Prohibited Investment Vehicles and Practices 6c. Socially Responsible Investing 6D. Mitigating Credit Risk in the Portfolio 6E. Mitigating Market Risk in the Portfolio 7

N. Specific Objectives and ExpectationsA. Overall Objective 8B. Specific Objective 8

v. Reporting, Disclosure and Program EvaluationA. Monthly Reports 8B. Annual Reports 8C. Internal Controls 8D. Annual Audit 9E. Special Audits 9

GlossaryofTerms 10

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INVESTMENT POLICYThe City ofArcataThe Arcata Community Development AgencyOriginally Adopted April15, 1998, Revised 6/18/03

I. INVESTMENT PHILOSOPHYA. Policy

1. This Investment Policy is set forth by the City of Arcata (the City) and the ArcataCommunity Development Agency .(ACDA), collectively referred to as the City, forthe following purposes:a) To establish a clear understanding for the City Council, City management,responsible employeeS, citizens and third parties of he objectives, policies and

guidelines for the investment of City and ACDA idle and surplus funds;b) To offer guidance to investment staff any external investment advisors onthe investment ofCity and ACDA funds; andc) To establish a basis for evaluating investment results

2. The City establishes investment policies which meet its current investment goals.The City shall review this policy annually; and may change its policies as itsinvestment objectives change.B. Investment Objectives

1. The objectives of this investment policy are, in order ofpriority:a) To ensure safety of invested funds;b) To maintain sufficient liquidity to meet cash flow needs;c) To attain a "market average rate of return" consistent with the primaryobjectives of safety and liquidity. The expected rate of return on the City'sportfolio is more specifically defined in Section IV; andd) To assure ongoing compliance with all Federal, State and local laws governingthe investment ofmoneys under the control of he City Treasurer.e) To invest public funds in a manner that contributes to the well-being andenrichment of he community.

C. Prudence1. The Prudent Person Standard shall be used by investment officials, and shall beapplied in the context ofmanaging an overall portfolio. Investment staff acting inaccordance with written procedures and the investment policy and exercising duediligence shall be relieved ofpersonal responsibility for an individual security's credit risk or market price changes, provided deviations from expectations arereported within 30 days and appropriate action is taken to control adversedevelopments.

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2. The Prudent Person Standard: When investing, reinvesting, purchasing, acquiring,exchanging, selling, and managing public funds, a trustee shall act with care, skill,prudence and diligence under the circumstances then prevailing, that a prudentperson acting in a like capacity and familiarity with those matters would use in theconduct offunds of a like character and with like aims, to safeguard the principaland maintain the liquidity needs of he agency. Within the limitations of hissectionand considering individual investments as part ofan overall strategy, atrustee is authorized to acquire investments as authorized by law.

D. Ethics and Conflicts of Interest1. Officers and employees involved in the investment process shall refrain frompersonal business activity that could conflict with proper execution of heinvestment program, orwhich could impair their ability to make impartialinvestment decisions.

II. OPERATIONAL AND PROCEDURALMATTERSA. Scope

1. The City's investment policy applies to all financial assets and investment activitiesof he City and ACDA with the following exceptions:a) The City's Deferred Compensation Plan is excluded because it is managed bya third party administrator and invested by individual plan participants; andb) Proceeds ofdebt issuance shall be invested in accordance with the generalinvestment philosophy of the City as set forth in this policy; however, such

proceeds are invested in accordance with permitted investment provisions oftheir specific bond indentures.

B. Delegation ofAuthority1. Authority to manage the City's investment program is derived from the California

Government Code Sections 53600 et seq. and Section 1100 of he Arcata MunicipalCode.2. The Citymay engage the services of one or more external investment managers toassist in the management of he City's investment portfolio in a manner consistent

with the City's objectives. Such external managers may be granted discretion topurchase and sell investment securities in accordance with this Investment Policy.Such managers must be registered under the Investment Advisors Act of 1940.

C. Authorized Financial Dealers and Institutions1. The City Treasurer shall determine which financial institutions are authorized toprovide investment services to the City and ACDA. Institutions eligible to transact

investment business with the City include:a) Primary government dealers as designated by the Federal Reserve Bank;

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b) Nationally or state-chartered banks;c) The Federal Reserve Bank; andd) Direct issuers of securities eligible for purchase by the City;

2. Selection of financial institutions and broker/dealers authorized to engage intransactions with the City shall be at the sole discretion of he City.3. All financial institutions which desire to become qualified bidders for investmenttransactions (and which are not dealing only with the investment adviser) mustsupply the City Treasurer with a statement certifying that the institution hasreviewed the California Government Code Section 53600 et seq. and the City'sInvestment Policy and that all securities offered to the City shall comply fully andin every instance with all provisions of the Code and with this Investment Policy.4. Public deposits shall be made only in qualified public depositories within the State

ofCalifornia as established by state law. Deposits shall be insured by the FederalDeposit Insurance Corporation, or, to the extent the amount exceeds the insuredmaximum., shall be collateralized with securities in accordance with State law.D. Delivery vs. payment

1. All investment transactions of he City shall be conducted using standard deliveryvs payment procedures where the security must be delivered before funds arereleased.E. Safekeepingofsecurities

1. To protect against potential loss by collapse of individual securities dealers, and toenhance access to securities, interest payments and maturity proceeds, all securitiesowned by the City shall be held in safekeeping by a third party bank 1rustdepartment, acting as agent for the City under the terms of a custody agreementexecuted by the bank and by the City.i l l . PERMITTED INVESTMENTS AND PORTFOLIO RISK MANAGEMENT

A. Authorized Investments: All investments shall be made in accordance with Sections53600 et seq. of he Government Code ofCalifornia and as described within thisInvestment Policy. Permitted investments under this policy shall include:1. Securities issued by the US Treasury, provided that there be no maximumallowable investment in US Treasury securities;2. Securities issued and fully guaranteed as to payment by an agency of he USGovernment, provided that there shall be no maximum allowable investment insuch securities;

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3. Banker's Acceptances provided that:a) they are issued by institutions the short term obligation ofwhich are rated aminimum ofP1 by Moody's orAl by S&P, or, i f he short term obligations areunrated, the long-term obligations ofwhich are rated a minimum ofA by

Moody's and S&P.b) the maturity does not exceed 180 days; andc) no more than 40 percent of he total portfolio may be invested in banker'sacceptances;

4. Federally insured time deposits (Non-negotiable certificates ofdeposit) inCalifornia banks with a maximum maturity of 180 days;5. Time deposits (Non-negotiable certificates ofdeposit) in California banks in excess

of insured amounts which are fully collateralized with securities in accordance withCalifornia law, provided that:a) no more than 20 percent of he portfolio shall be invested in a combination offederally insured and collateralized time deposits;b) they are issued by institutions which have long term debt rated "A" or higherby S&P or "A2" or higher by Moody's; and/or have short term debt rated atleast A1 by S&P or PI by Moody's; andc) the maturityofsuch deposits does not exceed 180 days;

6. Negotiable certificates ofdeposit (NCDs) provided that:a) they are issued by institutions which have long term debt rated "A" or higher

by S&P and Moody's; and/or have short term debt rated at least Al by S&P orPl by Moody's; the maturity does not exceed 180 days; andb) no more than 30 percent of he total portfolio may be invested in NCDs;

7. Repurchase agreements collateralized with securities authorized under Sectionslli(Al-2) of his policy maintained at a level ofat least 102 percent of he marketvalue of he repurchase agreements, provided that:a) the maximum maturity ofrepurchase agreements shall be 30 days;b) no more than 10 percent of he portfolio shall be invested in repurchase

~ e e m e n t s ; c) securities used as collateral for repurchase agreements, shall be delivered to theCity's custodian bank, except that securities used as collateral for the one toseven day repurchase agreements with the City's depository bank may be heldin safekeeping the depository bank's trust department in the name of he City,as evidenced by appropriate receipts of rust (See Section liE); andd) the repurchase agreements are the subject ofa master repurchase agreementbetween the City and the provider of the repurchase agreement. The masterrepurchase agreement shall be substantially in the form developed by thePublic Securities Association;

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8. Commercial paper provided that;a) the maturity does not exceed 180 days from the date ofpurchase;b) the issuer is a corporation organized and operating in the United States withassets in excess of $500 million;c) the paper is rated a minimum ofPl by Moody's Investor Service (Moody's)and Al by Standard & Poor's, Inc. (S&P); andd) no more than 15 percent of he portfolio is invested in commercial paper;

9. Corporate medium term n o ~ e s , provided that:a) such notes have a maximum maturity of five years;b) are issued by corporations organized and operating within the United States or

by depository institutions licensed by the United States or any state andoperating within the United States;

c) are rated in a rating category of''A" or its equivalent or better by Moody's andS ~ ; ~ .d) holdings of m e d i u m ~ t e r m notes may not exceed 30% of the portfolio;

10. Mortgage pass-through securities and asset-backed securities, provided that:a) such securities shall have a maximllll1 stated final maturity offive years;b) shall be rated AAA by S&P or Aaa by Moody's; andc) purchase of securities authorized by this subdivision may no t exceed 20

percent of the portfolio;11. Money market mutual funds, provided that such funds

a) are registered with the Securities and Exchange Commission and are ratedAAA by S&P or Aaa by Moody's; and

b) have retained an investment advisor registered or exempt from registrationwith the Securities and Exchange Commission with no t less than five years'experience investing in the securities and obligations authorized by CaliforniaGovernment Code Section 53601 (a througb.j) and with assets undermanagement in excess of $500 million.

12. State ofCalifornia Local Agency Investment Fund (LAIF), provided thata) The City and ACDA may investup to the maximum permitted amount inLAIF; andb) LAIF's investments in instruments prohibited by or not specified in the City'spolicy do not exclude it from the City's list ofallowable investments, providedthat the fund's reports allow the City Treasurer to adequately judge the riskinherent in LAIF's portfolio.

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B. Prohibited nvestment vehicles and practices1. State law notwithstanding, any investments not specifically described herein areprohibited, including, but not limited to, mutual funds (other than governmentmoney market funds as described in Section i l l A(ll), unregulated and/or unrated

investment pools or trusts, collateralized mortgage obligations and futures andoptions.2. In accordance with Government Code Section 53601.6, investment in inversefloaters, range notes, or mortgage derived interest-only strips is prohibited3. Investment in any security that could result in a zero interest accrual if held tomaturity is prohibiteq. 4. Trading securities for the sole purpose ofspeculating on the future direction ofinterest rates is prohibited.5. Purchasing or selling securities on margin in prohibited.6. The useof everse repurchase agreements, securities lending or any other form ofborrowing or leverage is prohibited.7. Prohibited investments held in the portfolio at the time ofadoption of this policymay be held until maturity at the discretion of he Treasurer.

C. Socially responsible investfug1. In accordance with City ofArcata policy, prohibited investments also include

investments in commercial paper or medium term notes ofcorporations that:a) receiye any of its revenue from the sale of obacco or tobacco products;b) receive any of ts revenue from the manufacture ofnuclear weapons or nuclearweapon components;c) receive any of it revenue from the production ofnuclear energy;

2. Any investment with or through the World Bank is also prohibited;3. In addition to the prohibitions outlined above, the l o n g ~ t e r m goal of his investmentpolicy shall be to prohibit investment in corporations with a record ofgross

ecological and environmental degradation; gross violations of he rights ofworkers; or corporations that invest in countries that have gross violations ofhuman rights.D. Mitigating credit risk in the portfolio

Credit risk is the risk that a security or a portfolio will lose some or all of its value dueto a real or perceived change in the ability of he issuer to repay its debt. The City shallmitigate credit risk by adopting the following strategies:

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1. The diversification requirements included in Section III (A) are designed tomitigate credit risk in the portfolio;2. No more than 5 percent of he total portfolio may be invested in securities of anysingle issuer, other than the US Government, its agencies and instrumentalities;3. The City may elect to sell a security prior to its maturity and record a capital gain

or loss in order to improve the quality, liquidity or yield of the portfolio in responseto market conditions or the City's risk preferences; and

4. I f securities owned by the City are downgraded by either Moody's or S&P to alevel below the quality required by this Investment Policy, it shall be the City's.policy to review the credit situation and make a determination as to whether to sellor retain such securities in the portfolio.a) I f a security is downgraded two grades below the level required by the City,

the security shall be sold immediately.b) If a security is downgraded one grade below the level required by this policy,the City Treasurer Will use discretion in determining whether to sell or hold thesecurity based on its current maturity, the loss in value, the economic outlookfor the issuer, and other relevant factors.c) I f decision is made to retain a downgraded security in the portfolio, itspresence in the portfolio will be monitored and reported monthly to the CityCouncil.

E. Mitigating market risk in the portfolioMarket risk is the risk that the portfolio will decline in value (or will not optimize itsvalue) due to changes in the general level of nterest rates. The City recognizes that,over time, longer portfolios achieve higher returns. On the other hand, longer termportfolios have higher volatility of return. The City shall mitigate market risk byproviding adequate liquidity for short term cash needs, and by making some longer terminvestments only with funds with are not needed for current cash flow purposes. TheCity further recognizes that certain types of securities, including variable rate securities,securities with principal paydowns prior to maturity, and securities with embeddedoptions, will affect the market risk profile of he portfolio differently in different interestrate environments. The City, therefore, adopts the following strategies to control andmitigate its exposure to market risk:1. The maximum sta.ted final maturity of ndividual securities in the portfolio shall befive years, except as otherwise stated in this policy;2. The City shall maintain a minimum of hree months of budgeted operatingexpenditures in short term investments; and3. The duration of the portfolio shall at all timestypically be approximately equal tothe duration of an index ofUS Treasury and Federal Agency Securities withmaturities from zero to five years (the Benchmark Index), plus or minus 10 percent.

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IV. SPECIFIC OBJECTIVES AND EXPECTATIONSA. Overall objective: The investment portfolio shall be designed with the overall objective

of obtaining a total rate of return throughout economic cycles, ex>mmensurate withinves1ment risk constraints and cash flow needs.B. Specific objective: The investment performance objective for the portfolio shall be toearn a total rate ofreturn over a market cycle which is approximately equal to the return

on the Benchmark Index.

V. REPORTING, DISCLOSURE AND PROGRAM EVALUATIONA. Quarterly re.ports

Quarterly reports shall be submitted by the City Treasurer to the City Council. Thesereports shall disclose at a minimum, the following information about the riskcharacteristics of he City's portfolio:1. An asset listing showing par value, cost and accurate and complete market value ofeach security, type of nstrument, issuer, andinterest rate;2. One page summary report which shows:

a) Average maturity of the portfolio and modified duration of he portfolio;b) Maturity distribution of he portfolio;c) Average portfolio credit quality; andd) Time-weighted total rate ofreturn for the portfolio for the prior three months,twelve months, year o-date, and since inception compared to the BenchmarkIndex returns for the same periods;

3. A statement of compliance with inves1ment policy, including a schedule of anytransactions or holdings which do not comply with this policy or with theCalifornia Government Code, including a justification for their presence in theportfolio and a timetable for resolution; and

4. A statement that the City has adequate funds to meet its cash flow requirements for. the next six months.

B. Annual Reports1. The investment policy shall be reviewed and adopted at least annually within 120days of the end of he fiscal year to ensure its consistency with the overallobjectives ofpreservation ofprincipal, liquidity and return, and its relevance to

current law and financial and economic trends.2. A comprehensive annual report shall be presented in conjunction with theinvestment policy review. This report shall include comparisons of he City'sreturn to the Benchmark Index return, shall suggest policies and improvements that

might enhance the investment p r o g r ~ and shall include an investment plan for thecoming year:8


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C. Internal controlsThe City Treasurer is responsible for establishing and maintaining an internal controlstructure designed to ensure that assets are protected from loss, theft or misuse. Theinternal control structure shall be designed to provide reasonable assurance that theseobjectives are met. Internal controls shall be in writing and shall address the followingpoints: control ofcollusion, separation of ransaction authority from accounting andrecord keeping, safekeeping ofassets and written confirmationof elephone transactionsfor investments and wire transfers.

D. Annual AuditThe City Treasurer shall establish an annual process of independent review by theCity 's external auditor to assure compliance with internal controls. Such audit willinclude tests deemed appropriate by the auditor.

E. Special AuditsThe City Council may at any time order an audit of he investment portfolio and/or theCity Treasurer's investment practices.

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Glossary of Terms

The following is a glossary ofkey investing terms, many ofwhich appear in the City'sInvestment Policy.Accrued Interest The accumulated interest due on a bond as of he last interest payment madeby the issuer.A g e n c y ~ A debt security issued by a federal or f e d e r a l l y ~ s p o n s o r e d agency. Federal agenciesare backed by the full faith and credit of the U.S. Government. F e d e r a l l y ~ s p o n s o r e d agencies(FSA's) are backed by each particular agency with a market perception that there is an implicitgovernment guarantee. An example of a Federal Agency is the Government National MortgageAssociation (GNMA). An example of a FSA is the Federal National Mortgage Association.Amortization The systematic reduction of he amount owed on a debt issue through periodicpayments of principal.Bankers Acceptance - A draft or bill or exchange accepted by a bank or trust company. Theaccepting llistitution, as well as the issuer, guarantees payment of he bill.Basis Point - A unit ofmeasurement used in the valuation of f i x e d ~ i n c o m e securities equal to1/100 of 1% ofyield, e.g, "114" of one percent is equal to 25 basis points.Bid The indicated price at which a buyer is willing to purchase a security or commodity.Book Value - The value at which a security is carried on the inventory lists or other financialrecords ofan investor. The book value may differ significantly from the securities current valueon the market.Callable Bond A bond issue in which all or part of its outstanding principal amount may beredeemed before maturity by the issuer under specified conditions.Collateralization - A process by which a borrower pledges securities, property, or other depositsfor the purpose ofsecuring the repayment ofa loan and/or security.Commercial Paper - An unsecured short-term promissory note issued by corporations, withmaturities ranging from 2 to 270 days.Coupon- The annual rate of nterest that a bond's issuer promises to pay the bondholder on thebond's face value; a certificate attached to a bond evidencing interest due on a payment date.Custodian - A bank or other financial institution that keeps custody ofstock certificates andother assets.Dealer - Someone who acts as a principal in all transactions, including buying and selling fromhis/her own account/

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Discount - The amount by which the par value ofa security exceeds the price paid for thesecurity.Diversification - A process i f nvesting assets among a range ofsecurity types by sector,maturity and quality rating.Fair Value - The amount at which an investment could be exchanged in a current transactionbetween willing parties.Interest Rate - The annual rate of income received by an investor from the issuer of certaintypes offixed income securities. Investment Policy - A concise and clear statement of the objectives and parameters formulatedby an investor or investment manager for a portfolio of investment securities.Liquidity An asset that can be converted easily and quickly to cash without significant loss ofvalue.Local Agency Investment Fund - A voluntary investment fund open to government entities inCalifornia that is managed by the State Treasurer's Office.Market Value - The price at which a security is trading and presumably could be purchased orsold at a particular point in time.Maturity - The date on which the principal or stated value ofan investment becomes due andpayable.Money Market Mutual Fund - Mutual funds that invest solely in money market instruments(short-term debt instruments, such as Treasury bills, commercial paper, banker's acceptance,repos and federal funds)Mutual Funds - An investment company that pools money and can invest in a variety ofsecurities, including fixed-income securities and money market instruments.Par Value- The ammmt ofprincipal which must be paid at maturity. Also referred to as theface amount ofa bond, typically $1,000 per bond.Premium - The amount by which the price paid for a security exceeds the securities par value.Principal - The face value or par value ofa debt instrument, or the amount of capital invested ina given security.Prospectus - A legal document that must be provided to any prospective of a new securitiesoffering registered with the SEC that typically includes information on the issuer, the issuer'sbusiness, the proposed use ofproceeds, the experience of he issuer's management, and certaincertified financial information (also known as an "official statement").Portfolio- Combined holding ofmore than one stock, bond, commodity, real estate investment,cash equivalent, or other asset. T

Consideration of a Resolution updating the City’s financial policies 03-05-13

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Transcript of Consideration of a Resolution updating the City’s financial policies 03-05-13